Should You Buy This Debt-Free Men's Retailer?

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Are you interested in investing in men’s suits retail, including tuxedo rentals? This specialty retailer has been generating profits and positive free cash flow for the last 10 years, with no help of leverage. In addition, according to Barron’s, even though it posted lower than expected third quarter earnings results and adjusted its full year guidance downward, its shares could rise as high as 25% next year.  It is The Men’s Wearhouse (NYSE: MW). Let’s look at the fundamentals to see whether or not it might be an opportunity for us.

Business overview

Men’s Wearhouse, with nearly 1,200 retail stores in the US and Canada, is considered to be one of the largest men’s suits specialty retailer and the tuxedo rental product supplier's in the US, operating several brand names, including Men’s Wearhouse, Men’s Wearhouse and Tux, K&G, and Moores. More than 68% of the total revenue came from Men’s Wearhouse and Men’s Wearhouse and Tux stores, whereas K&G stores accounted for 17.5% and Moores accounted for only 12.5% of total sales in 2011. In terms of purchasing, Men’s Wearhouse diversified its supplier base of around 900 vendors, whereas no vendor took more than 10% of the total purchases in 2011.

Historical operating performance

Men’s Wearhouse has managed to deliver profits in the last 10 years, with positive cash flow and growing, but fluctuating revenue and EPS. 

<table> <tbody> <tr> <td> <p><em>USD million</em></p> </td> <td> <p><strong>2002</strong></p> </td> <td> <p><strong>2003</strong></p> </td> <td> <p><strong>2004</strong></p> </td> <td> <p><strong>2005</strong></p> </td> <td> <p><strong>2006</strong></p> </td> <td> <p><strong>2007</strong></p> </td> <td> <p><strong>2008</strong></p> </td> <td> <p><strong>2009</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2011</strong></p> </td> </tr> <tr> <td> <p><strong>Revenue</strong></p> </td> <td> <p>1,295</p> </td> <td> <p>1,393</p> </td> <td> <p>1,547</p> </td> <td> <p>1,725</p> </td> <td> <p>1,882</p> </td> <td> <p>2,113</p> </td> <td> <p>1,972</p> </td> <td> <p>1,910</p> </td> <td> <p>2,103</p> </td> <td> <p>2,383</p> </td> </tr> <tr> <td> <p><strong>Net Income</strong></p> </td> <td> <p>42</p> </td> <td> <p>50</p> </td> <td> <p>71</p> </td> <td> <p>104</p> </td> <td> <p>149</p> </td> <td> <p>147</p> </td> <td> <p>59</p> </td> <td> <p>46</p> </td> <td> <p>68</p> </td> <td> <p>121</p> </td> </tr> <tr> <td> <p><strong>EPS (USD)</strong></p> </td> <td> <p>0.69</p> </td> <td> <p>0.85</p> </td> <td> <p>1.29</p> </td> <td> <p>1.88</p> </td> <td> <p>2.71</p> </td> <td> <p>2.73</p> </td> <td> <p>1.13</p> </td> <td> <p>0.86</p> </td> <td> <p>1.27</p> </td> <td> <p>2.3</p> </td> </tr> <tr> <td> <p><strong>FCF</strong></p> </td> <td> <p>68</p> </td> <td> <p>70</p> </td> <td> <p>45</p> </td> <td> <p>88</p> </td> <td> <p>86</p> </td> <td> <p>79</p> </td> <td> <p>41</p> </td> <td> <p>106</p> </td> <td> <p>111</p> </td> <td> <p>71 </p> </td> </tr> </tbody> </table>

In terms of 10-year average, its net income is $85.7 million, with an average EPS of $1.57, and the free cash flow averaged $76.5 million.

In terms of operating figures, it seems that Men’s Wearhouse experienced fluctuating performance, with ups and downs in its comparable store sales growth. During the 2007 – 2009 period, Men’s Wearhouse and K&G stores had negative comp store sales growth. Men’s Wearhouse’s comp store sales growth just turned positive in 2010 (4.7%) and K&G stores just turned positive in 2011. Interestingly, Men’s Wearhouse began to pay dividends in 2006, and it has kept increasing its dividends since then, from $0.20 per share to $0.36 per share in 2011, while maintaining the decent payout ratio. The dividend yield is currently 2.4%, with a 25.7% payout ratio.

Debt-Free Capital Structure

Men’s Wearhouse employed no debt for its operations. As of October 2012, it had more than $1.1 billion in total stockholders’ equity, $138 million in cash, and no interest-bearing debt. The largest item in liabilities was accounts payable, $171 million, accounting for only around 11% of the total assets. In addition, Men’s Wearhouse kept purchasing its own stocks in the market place, thus the treasury stock increased from $414 million in fiscal 2008 to $477 million currently.

Cheap valuation

With the enterprise value of $1.41 billion, the market is valuing Men’s Wearhouse at nearly 5x EV/EBITDA.  Compared to its peers Jos. A. Bank Clothiers (NASDAQ: JOSB), TJX Companies (NYSE: TJX), and Macys (NYSE: M), Men’s Wearhouse currently pays the highest yields. Jos. A. Bank doesn’t pay any dividends, whereas TJX and Macy’s are paying 1.2% and 1.8% yield, respectively.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>MW</strong></p> </td> <td> <p><strong>JOSB</strong></p> </td> <td> <p><strong>TJX</strong></p> </td> <td> <p><strong>M</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>5.4</p> </td> <td> <p>9.17</p> </td> <td> <p>7.15</p> </td> <td> <p>5</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>12.3</p> </td> <td> <p>16.2</p> </td> <td> <p>43.28</p> </td> <td> <p>10.67</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0</p> </td> <td> <p>0</p> </td> <td> <p>0.2</p> </td> <td> <p>1.2</p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p>4.95</p> </td> <td> <p>5.05</p> </td> <td> <p>9</p> </td> <td> <p>5.94</p> </td> </tr> <tr> <td> <p><strong><span>Div</span> yield (%)</strong></p> </td> <td> <p>2.8</p> </td> <td> <p>N/A</p> </td> <td> <p>1.2</p> </td> <td> <p>1.8</p> </td> </tr> </tbody> </table>

In the table presented above, TJX is the most efficient operation with the highest return on invested capital among the four, at 43.28%. Thus, it receives the highest valuation, nearly two times higher than valuations of the other three. Jos. A. Bank enjoys the highest net margin, with the second rank in ROIC, but it didn’t pay any cash dividends for now.

My Foolish Take

Even with the bullish attitude published in Barron’s in Men’s Wearhouse, the most catch in Men’s Wearhouse compared to its peers is the high dividend yield. In terms of operation, I’d rather pick TJX or Jos. A. Bank for its more efficient performance. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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